Intra-family Gifting

When creating a gifting strategy for family, outright gifts may not be ideal if the recipients are minors or if you wish to limit or delay the beneficiary’s access to the gifted assets.  UTMA accounts, 529 Plans, and special trusts are just a few of the gifting vehicles available that allow donors to utilize the annual gift exclusion amount ($16,000/per donor in 2022).

Below are just some of the attributes of these methods to help you learn more about your options.

UTMA or Uniform Transfer to Minors Act Custodianship Account

  • Contributions can qualify for the annual gift-tax exclusion ($16,000 in 2022).
  • Donors may gift stocks, bonds, or cash to the account, and the custodian may continue to invest in these as well as any other prudent investments.  
  • The child has no control until the “age of majority” (age 18 or 21 depending on your state’s law), but the child obtains complete control of the account at the age of majority.
  • The custodian may not change the beneficiary on the account or reverse the gift.
  • The custodian may use the assets for the child’s benefit, which may include expenses for education, health, support, and maintenance.
  • Interest, dividends, and capital gains are not tax deferred and are generally taxed at the parent’s rate.
  • Gifts to a UTMA on which you are not the custodian are removed from your estate and will not be subject to estate taxes at your passing. If you are the donor and the custodian upon your passing, the assets will be included within your estate and be subject to estate taxes.
  • UTMAs are offered through most banks and financial institutions, and do not require legal assistance to open, fund, or administer.

529 Savings Plan

  • Contributions qualify for the annual gift-tax exclusion. Each donor can front-load or “super fund” the 529. This means that one can contribute 5years of $16k gifts ($80k) in one year and avoid gift taxes, but you still must file a gift tax return.
  • Only cash may be contributed to a 529 plan, and the investment options are limited to stock and bond mutual funds or ETFs. 
  • The beneficiary does not have control or ownership of the plan’s assets.
  • The beneficiary does not need to be a minor, and the owner may change the beneficiary to a qualified family member at any time.
  • The interest, dividends, and capital gains are tax-deferred.
  • If the account is used for qualified education expenses, the gains are tax-free.  If the funds are not used for qualified education expenses, the gains (only the gains) will be subject to taxes and penalties, while the principal avoids penalty. 
  • There is no deadline for using the funds or depleting the account.  
  • Gifts to the 529 plan are removed from your estate and will not be subject to estate taxes even if you are the owner at the time of your passing.
  • 529 plans are offered through many financial institutions, and do not require legal assistance to open, fund, or administer.

Special Irrevocable Trusts

Section 2503c Minor’s Trust

  • Contributions can qualify for the annual gift-tax exclusion if the beneficiary is under the age of 21.
  • You may gift stocks, bonds, or cash to the account and continue to invest in these as well as any other prudent investments.  
  • There can only be one beneficiary, the beneficiary cannot be changed, and the gift cannot be reversed.
  • The trustee may use the assets for the child’s benefit, which may include expenses for education, health, support, and maintenance. Upon reaching 21, the beneficiary gains access to the trust’s assets.
  • Interest, dividends, and capital gains are not tax-deferred, and annual trust tax returns may be necessary.
  • The gifted property and future appreciation are removed from the donor’s estate as long as the donor does not serve as the trustee of the trust.
  • Legal assistance is required to create the trust and to ensure the trust is properly administered.

Crummey Trust

  • Contributions are entitled to the annual gift-tax exclusion if the contribution is available for withdrawal by the beneficiary during the predetermined access period, which can be as short as 30 days. Once the access period expires, the trustee becomes the only party with access to the gifted funds. The beneficiary’s legal right to withdraw the contribution during the access period is known as the “Crummey” power and is named after the court case Crummey vs Commissioner.
  • Donors may gift stocks, bonds, or cash to the account and continue to invest in these as well as any other prudent investments.  
  • The trust can have multiple beneficiaries of any age.
  • The distribution of income can be discretionary.
  • The trustee may use the assets for the child’s benefit, which may include expenses for education, health, support, and maintenance
  • Interest, dividends, and capital gains are not tax-deferred. Either the beneficiary or the trust will be liable for paying any taxes owed. 
  • The gifted property and future appreciation are removed from the donor’s estate as long as the donor does not serve as the trustee of the trust.
  • Legal assistance is required to create the trust, and annual administration is required to document the contribution and the beneficiary’s right to withdraw the funds during the access period.

Each method has various advantages and disadvantages, and the use of more than one method may be necessary to accomplish your gifting goals. If you are not sure where to start, first decide what you would like the gift to accomplish and what usage or timing restrictions you would like to implement. These two factors may make the decision more apparent.  If you would like to discuss the merits of these strategies considering your unique circumstances, please call us at your earliest convenience.  Before implementing any special trusts or altering your estate plan, please work directly with your estate attorney.